IBM layoffs don’t help stock, as analysts still fret over cash flow

International Business Machines Corp.


shares fell as much as 5.5% to an intraday low of $132.98, while the Dow Jones Industrial Average

– counting IBM as a component – up 0.2%, S&P 500

up 0.5% and the tech-heavy Nasdaq Composite Index

1% increase.

IBM reported its biggest sales increase in a decade on Wednesdayup 5.5% to $60.53 billion, but Wall Street is more concerned with free cash flow, or FCF, which is much below expectations at $9.3 billion with a forecast of 10 $0.5 billion for FCF in 2023. IBM has confirmed thousands of layoffs for MarketWatch independent of earnings, though executives did not discuss those cuts or the relationship their relationship to cash flow in Wednesday’s report and conference call.

Analysts surveyed by FactSet had forecast an FCF of $11.03 billion ahead of earnings. A year ago, IBM CEO Arvind Krishna has forecast an FCF of $10 billion to $10.5 billion in 2022 and declined to give an EPS forecast.

Read: IBM posts biggest annual revenue increase in over a decade, announces 3,900 layoffs

MoffettNathanson analyst Lisa Ellis said the IBM report showed FCF’s “mixed luck” at work. Ellis says that when Krishna became chief executive three years ago, he dropped all focus on earnings per share, choosing to focus more on revenue growth and FCF.

“The mixed advantage of FCF-centric targeting is that there’s nowhere to hide—it’s transparent, and it is, for better or worse,” Ellis said.

One example Ellis cited, and one of the reasons she upgraded IBM to operating status last week, was the company’s divestment from its managed infrastructure services business. , which became Kyndryl Holdings Inc.
Ellis said that while Kyndryl before the split contributed nearly $20 billion, or 25%, to revenue, the segment accounted for less than $1 billion, or 10%, to FCF and that contribution. is decreasing.

Read: Morgan Stanley reverses IBM upgrade in 9 months as shares outperform broader market

Morgan Stanley analyst Eric Woodring, who has an balanced rating and a $143 price target, said FCF missed its estimate by 30%, “implying a steep ramp to meet target CY22- 24 by IBM.”

That said, Woodring said that 2023 “is still a story for me to see.” Even as IBM makes improvements to its partner ecosystem, “we still consider pricing rich amid slowing growth.”

Shares of IBM, even with Thursday’s drop, are still up 0.5% over the past 12 months, compared with a 7% drop in the S&P 500.

Stifel analyst David Grossman, who has a buy rating and $150 price target, said IBM’s steady revenue trend has been “overshadowed” by “sluggish FCF guidance”.

“Despite inline sales and margins continuing to expand, FCF remains in the $10 billion range, after normalization for working capital flows, which are one-sided,” said Grossman. control row,” and likely explains the pressure on stocks, Grossman said.

“Defensive and/or dividend holders (4.7%) may be satisfied; however, the Q4 results and outlook are unlikely to attract increased interest, which increases the risk of IBM becoming a capital source if Treasury yields remain elevated or sentiment improves,” Grossman said. speak.

Read: IBM just broke a nearly three-decade winning streak

B of A Securities analyst Wamsi Mohan, who has a Buy rating and a $152 price target, said “investors may be concerned about the business’s trajectory in 2023 due to management comments The rationale suggests that returns will skew more in 2H (67%) than in a typical year (61%).”

“While Q1 revenue will fall within the target model on a constant currency basis, Q2 will face tough results from the launch of powerful mainframes in March,” Mohan said. last year,” said Mohan.

Of the 18 analysts surveyed by FactSet about IBM, 5 have a buy rating, 12 have a hold rating, and one has a sell rating, along with an average price target of $144.82. compared to $140.29 at the end of 2022.


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